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Society of Certified Management Accountants of Sri Lanka

Intermediate Stage March 2009 Examination
Examination Date : 4th April 2009 Examination Time: 1.30 p:m.- 4.30 p:m. Number of Pages : 04 Number of Questions: 05

Instructions to candidates: 1. 2. 3. Time allowed is three (3) hours. Answer all questions. Answers should be entirely in the English language.

Subject
Taxation
Question No. 1 (35 Marks)

Subject Code
(TAX / 605)

Vikings Ltd., a company manufacturing soap powder furnishes the following information for the year of assessment 2007/08. From the information supplied compute the companys Statutory Income, Assessable Income, Taxable Income and the Balance Tax Payable for the year of assessment 2007/08. Except where indicated otherwise, all assets were acquired in April 2005. The building was also constructed in the same year. Notes: (i) (ii) The net profit before taxation amounted to Rs. 30,000,000. The other income included in the net profit consists of the following: Gross income from rent on the part of the building given out on rent Less: Relevant rates for the part Less: Repairs incurred on this part Net Rent Dividends received (net) Interest on treasury bills Gain on sale of Car Rs. 50,000 and Lorry 150,000 63,000 360,000 200,000 Rs. 500,000 30,000 470,000 280,000 190,000

(iii) Expenses included the following:

Society of Certified Management Accountants of Sri Lanka Intermediate Level Taxation (TAX / 605) March 2009 CMA Examination 1

Depreciation Loss on Sale of Computer Advertisements Entertainment Formation Expenses (part written off this year) Donations Bad Debts (iv) (a) Assets Land Buildings Motor Cars Plant & Machinery Lorries Computers Furniture (b) Depreciation Buildings Motor Cars Plant & Machinery Lorries Computers Furniture (v) (vi) Balance 01.04.07 160,000 1,570,000 1,600,000 1,200,000 150,000 52,000 Charge for year 80,000 1,000,000 800,000 610,000 56,000 26,000 Disposals 700,000 250,000 50,000 Balance 01.04.07 3,000,000 8,000,000 7,000,000 8,000,000 6,000,000 300,000 260,000 Additions 2,000,000 750,000 1,200,000 Disposals 1,800,000 1,100,000 75,000 -

Rs. 2,572,000 10,000 400,000 300,000 90,000 200,000 60,000

Balance 31.03.08 3,000,000 8,000,000 7,200,000 8,750,000 6,100,000 225,000 260,000 Balance 31.03.08 240,000 1,870,000 2,400,000 1,560,000 156,000 78,000

Motor Cars are provided to the executives for private and business travelling. One Car was sold during the year and a new one was purchased to replace it. A Lorry was sold during the year and was replaced with a second hand Lorry.

(vii) A Computer sold was replaced during the year. (viii) Advertisement Expenses: Advertising Goods in the School Magazine Advertising Goods in Trade Journals (ix) (x) Rs. 75,000 Rs. 325,000

Formation expenses incurred in 2005 are being written off over a 5 year period. Donations consist of the following: Cash donation of Rs. 150,000 to YMBA, an approved charity Donation of Soap to the National Hospital, Colombo Rs. 150,000 Rs. 50,000

(xi)

The Bad Debt of Rs. 60,000 is in respect of a loan given to an employee, who was dismissed. (Total 35 Marks)

Society of Certified Management Accountants of Sri Lanka Intermediate Level Taxation (TAX / 605) March 2009 CMA Examination

Question No. 2 (30 Marks) Mr. Royle, a surveyor retired from Government Service on reaching 60 years of age on 30th September 2007, commenced employment in the private sector company. According to the details provided by him, relevant to the year of assessment, you are required to compute the Statutory Income, the Assessable Income, Taxable Income, the Gross Income Tax and the Balance Income Tax Payable for the year of assessment 2007/08. You should clearly state whether any income is exempt from tax and whether any deductions claimed are disallowable. (i) (ii) Salary form the government from 01.04.2007 to 30.09.2007 Pension from the government from 01.10.2007 to 31.03.2008 Rs. 270,000 Rs. 200,000 Rs. 450,000

(iii) Salary from the company 01.10.2007 to 31.03.2008 (iv)

Free accommodation was provided by the company for the entire family in Matara. The rent paid by the company for 6 months amounted to Rs.240,000. The rating assessment of this house was Rs. 12,000 and the rates paid amounted to Rs.1,500 per quarter. He received the following dividend from Fruity Limited: Dividend out of liable profit (Net) Rs. 36,000 Out of exempt profit Rs. 20,000 He has rented his house at Battaramulla to a foreign national. The gross rent is Rs.40,000 per month and the rates (paid by the owner) amounted to Rs.3,000 per quarter. The repairs borne by Mr. Royle amounted to Rs.56,000. This house which had been purchased by him in 1995 had an annual value of Rs.60,000.

(v)

(vi)

(vii) Interest paid by him to the Bank of Ceylon on a loan utilized by him for the purchase of the house at Battaramulla amounted to Rs. 42,000. A further amount of interest amounting to Rs. 11,000 was paid to the bank on a Car loan taken by Mr. Royle. (viii) He has received during the year gross interest amounting to Rs.150,000 from the National Savings Bank. (ix) (x) The provident fund deduction amounted to Rs.36,000. Donations made for the year consisted of: Cash donation to the Cancer Society (approved charity) Rs. 50,000 Cost of paint to paint the walls of the National Hospital, Ward 47 Rs. 110,000 The PAYE deduction by the employer amounted to Rs.39,000. (Total 30 Marks)

(xi)

Society of Certified Management Accountants of Sri Lanka Intermediate Level Taxation (TAX / 605) March 2009 CMA Examination

Question No. 3 (15 Marks)

(a)

(b)

According to the following particulars submitted by Wijaya Ltd. a manufacturer of nails, registered for VAT for the month of January 2008, compute the VAT payable by the company for the month. (All items are excluding VAT) Rs. Sales 4,000,000 Import of raw material 2,800,000 Import of Air Conditioner for the office (luxury rate item) 300,000 Purchases from persons not registered for VAT 200,000 Electricity (exempt from tax) 96,000 Telephone expenses 80,000 (13 Marks) Exports are zero rated. Explain the significance of the statement in relation to the Value Added Tax. (02 Marks) (Total 15 Marks)

Question No. 4 (10 Marks)

(a)

What is the definition of Turnover for purposes of the Economic Service Charge? (04 Marks) Is the Economic Service Charge an annual levy or a quarterly levy in the year of assessment? (02 Marks) What is the turnover limit for application of the Economic Service Charge from 01.04.2007? (02 Marks) What is the maximum limit for application of the Economic Service Charge for a quarter commencing from 01.04.2007? (02 Marks) (Total 10 Marks)

(b)

(c)

(d)

Question No. 5 (10 Marks)

Individual who have income from interest from deposits in financial institutions are liable to a withholding tax on interest. Explain the basis on which the financial institutions deduct the tax in the case of individuals.
(Total 10 Marks)

End of Question Paper

Society of Certified Management Accountants of Sri Lanka Intermediate Level Taxation (TAX / 605) March 2009 CMA Examination